MODEL WEALTH PORTFOLIOS (MWP) PROGRAM FORM BROCHURE

Transcription

1 MODEL WEALTH PORTFOLIOS (MWP) PROGRAM FORM BROCHURE LPL Financial LLC 75 State Street, 22nd Floor, Boston, MA (617) December 16, 2017 This program brochure provides information about the qualifications and business practices of LPL Financial ( LPL ). If you have any questions about the contents of this brochure, please contact your LPL financial advisor or LPL at lplfinancial.adv@lpl.com. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission ( SEC ) or by any state securities authority. Additional information about LPL also is available on the SEC s website at ITEM 1 COVER PAGE ITEM 2 MATERIAL CHANGES The following is a summary of certain changes made to this Brochure from the time of the annual update of the Brochure dated March 30, Item 4 was updated to reflect the elimination of the Strategist Fee for LPL Research models effective January 1, 2016, reduced Strategist Fees for certain other strategists models effective October 1, 2016, and a new Program Fee schedule effective January 1, Items 4 and 6 were updated to provide that the IAR (as defined below) for an account may also act as Portfolio Strategist for that account. Item 6 was updated to provide that LPL Research will cease to offer portfolios differentiated between Diversified and Diversified Plus. Item 9 was updated to provide information regarding disciplinary events, involving (i) FINRA sanctions in connection with LPL s systems and supervisory procedures relating to the creation and distribution of certain required account notices (2016), (ii) FINRA sanctions in connection with LPL s systems and supervisory procedures relating to the format in which certain electronic records were retained (2016), (iii) a consent order with the Massachusetts Securities Division ( MSD ) related to LPL s oversight of certain variable annuity transactions (2017), (iv) a consent order with the MSD related to LPL s supervisory practices for LPL representatives located on the premises of a credit union (2017), and (v) a consent order with the New Jersey Bureau of Securities related to sale of non-traded alternative investments in excess of prospectus standards or LPL s internal guidelines and the maintenance of related books and records (2017). Item 9 was updated to provide that beginning July 18, 2016, LPL changed the default cash sweep option for uninvested cash balances in certain accounts from money market funds to an FDIC-insured bank deposit cash sweep program referred to as the LPL Financial Deposit Cash Account (DCA). Item 9 was also updated to provide additional information on client referrals. ITEM 3 TABLE OF CONTENTS ITEM 1 COVER PAGE... 1 ITEM 2 MATERIAL CHANGES... 1 ITEM 3 TABLE OF CONTENTS... 1 ITEM 4 SERVICES, FEES AND COMPENSATION... 2 ITEM 5 ACCOUNT REQUIREMENTS AND TYPES OF CLIENTS... 6 ITEM 6 PORTFOLIO MANAGER SELECTION AND EVALUATION... 6 ITEM 7 CLIENT INFORMATION PROVIDED TO PORTFOLIO MANAGERS ITEM 8 CLIENT CONTACT WITH PORTFOLIO MANAGERS ITEM 9 ADDITIONAL INFORMATION LPL FINANCIAL LLC Page 1

2 ITEM 4 SERVICES, FEES AND COMPENSATION Services LPL offers various types of advisory services and programs, including wrap fee programs, mutual fund asset allocation programs, an advisor-enhanced digital advice program, advisory programs offered by third party investment advisor firms, financial planning services, and retirement plan consulting services. This Brochure provides a description of the advisory services offered under LPL s Model Wealth Portfolios ( MWP ) program. For more information about LPL s advisory services and programs other than MWP, please contact your LPL investment advisor representative ( IAR ) for a copy of a similar brochure that describes such service or program or go to LPL is also a broker-dealer registered with the Financial Industry Regulatory Authority ( FINRA ), and an IAR also may be registered with LPL as a broker-dealer registered representative. Therefore, an IAR may be able to offer a client both investment advisory and brokerage services. Before engaging with an IAR, clients should take time to consider the differences between an advisory relationship and a brokerage relationship to determine which type of service best serves the client s investment needs and goals. Clients should speak to the IAR to understand the different types of services available through LPL. Clients also should refer to the informational brochure on titled Working with an LPL Financial Advisor: The Choice Between Advisory Services and Brokerage Services. The MWP program is a professionally managed mutual fund and exchange-traded fund ( ETF ) asset allocation program in which LPL and its investment advisor representatives ( IARs ) provide ongoing investment advice and management. The IAR obtains the necessary financial data from the client, assists the client in determining the suitability of the program and assists the client in setting an appropriate investment objective. The IAR selects a model portfolio of funds ( Portfolio ) designed by LPL s Research Department, a third-party investment strategist or IAR (each, a Portfolio Strategist ) consistent with the client s stated investment objective. The IAR provides ongoing advice on the selection or replacement of a Portfolio based on the client s individual needs. The IAR may choose more than one Portfolio to be managed within a single MWP account. The MWP program also permits clients to select a third party investment advisor firm associated with an LPL registered representative, in lieu of an IAR, to provide the advisory services described in this brochure. The Portfolio Strategist is responsible for selecting the mutual funds and/or ETFs within a Portfolio and for making changes to the funds selected. LPL has discretion to buy and sell securities in the account according to the Portfolio selected and liquidate previously purchased securities that are transferred into the account. Exchange-traded notes ( ETN ) and closed-end funds may also be purchased in an account. The client authorizes LPL and the IAR to have discretion by executing the Account Agreement and Application. Except for LPL and IAR, the Portfolio Strategists are independent investment advisor firms. Portfolio Strategists provide LPL on an ongoing basis with a Portfolio that includes recommended asset allocations and funds. LPL enters into an agreement with the Portfolio Strategist for these Portfolio services. Except for LPL and IAR, Portfolio Strategist does not have discretion from the client to implement the Portfolio and does not provide individualized investment advice to specific program clients. In certain cases, a Portfolio may consist only of mutual funds and/or ETFs within the same fund family or within affiliated fund families. In such a Portfolio, the Portfolio Strategist will select only those funds within the fund family or affiliated fund families, and a third party Portfolio Strategist or its affiliates may earn two levels of fees with respect to the assets: a strategist fee and fund-level fees, including fund management fees. LPL acts as the overlay portfolio manager ( OPM ) in coordinating the trades in the account and performing tax harvesting services. LPL expects to closely track the Portfolios, applying discretion only to redress particular account issues, including tax rebalancing, loss harvesting, tracking error from the Portfolio, customized requests, and investment restrictions placed on the account. LPL as the OPM is responsible for rebalancing accounts in accordance with the allocations in the Portfolio. LPL will review an account to determine if rebalancing is appropriate based on the frequency selected by the client at account opening or as altered by the client or the IAR from time to time. The choices for frequency of rebalancing review are quarterly (four times per year), semiannually (two times per year) or annually (once per year). At each rebalancing review date, LPL will rebalance the account only if at least one fund position is outside a pre-determined range, subject to a minimum transaction amount LPL FINANCIAL LLC Page 2

3 established by LPL in its discretion. In addition, LPL will review an account for rebalancing in the event that the Portfolio Strategist changes the allocation targets. LPL, at the request of the client or IAR, performs tax harvesting. In such case, proceeds of tax-related transactions may be held in cash until appropriate wash sale periods have expired. Once the wash sale period has expired, the related proceeds will be invested according to the current targeted allocation for the Portfolio. In addition, LPL may delay placing rebalancing transactions for non-retirement accounts by a number of days, to be determined by LPL, in an attempt to limit short-term tax treatment for any position being sold. Under certain conditions, LPL also will accommodate requests for all or a portion of an account to remain allocated to cash for a period of time. Such customized requests, liquidation requests in connection with withdrawals, and changes to the Portfolio(s) or investment objective selected may take up to 5 business days to process, and, in certain circumstances, may take longer. In connection with the program, LPL also acts as custodian to accounts, provides brokerage and execution services as the broker-dealer on transactions, and performs administrative services, such as quarterly performance reporting to clients. Fee Schedule In the MWP program, clients pay the following fees (collectively, the Account Fee ): Advisor Fee. The Advisor Fee is an annual fee for the investment advisory services of IAR that is set out in the Account Application. The Advisor Fee is a straight percentage based on the value of all assets in the account, including cash holdings. The Advisor Fee will not exceed 2.00%. The Advisor Fee is negotiable between the client and the IAR and is shared between LPL and the IAR. LPL shares up to 100% (typically between 90% and 100%) of the Advisor Fee with the IAR based on the agreement between LPL and the IAR. A portion of the Advisor Fee to the IAR may be paid by the IAR to his or her LPL branch manager or another LPL representative for supervision or administrative support. Strategist Fee. Depending upon the model selected for the account, clients will pay a fee for the model portfolio design services of a Portfolio Strategist. This fee presently ranges from 0% to 0.20%. A list of the current models and their associated fee rates are set out below. For Portfolios designed by Portfolio Strategists other than LPL and IAR, LPL pays all or a portion of the Account Fee to the Portfolio Strategist. Portfolio Strategist Fee Rate LPL Financial Research 0.00% IAR 0.00% AlphaSimplex Group 0.00% BlackRock 0.00% for all strategies except the Tactical ETF at 0.15% Cougar Global Investments 0.20% Innealta Capital 0.20% J.P. Morgan Asset Management 0.00% Morningstar Investment Services 0.15% 0.20% Quantitative Advantage 0.20% LPL FINANCIAL LLC Page 3

4 LPL Program Fee. Clients will pay a fee for the investment advisory, administrative, trading and custodial services of LPL according to the schedule set out below, and depending on the investment model selected for the account. The schedule below indicates the Program Fee for models under Program Fee A and B. LPL determines whether a model is under Program A or B based on the strategic or tactical investment mandate of the model. Model Allocation Value Program Fee A Program Fee B $0 $99, % 0.45% $100,000 $749, % 0.35% $750,000 $1,249, % 0.30% $1,250,000 $4,999, % 0.28% $5,000,000 $24,999, % 0.23% $25,000, % 0.18% Please note that if the Account includes more than one model, the applicable Strategist Fee and Program Fee rate applies to the assets invested in that model. LPL reserves the right to increase the upper limit of the Strategist Fee range and Program Fee range upon 30 days prior notice to clients. If the IAR changes the model selected for the Account, or if the model investment value changes, the aggregated Account Fee may increase or decrease, depending on the applicable Strategist Fee and the LPL Program Fee level. Legacy Fee Structure Accounts remaining under the legacy fee structure (those Accounts opened before January 1, 2016 that have not converted to the new fee structure described above) are charged an aggregate Account Fee, which was negotiated between the client and the IAR and set out in the Account Application. This aggregate Account Fee under the legacy fee structure is a straight percentage based on the value of all assets in the account, including cash holding. The maximum aggregate Account Fee is 2.50%. The Account Fee is paid to LPL, and LPL retains the LPL Program Fee pursuant to the schedule set forth above. For Portfolios designed by Portfolio Strategists other than LPL and IAR, LPL pays a portion of the Account Fee to the Portfolio Strategist. LPL shares up to 100% (typically between 90% and 100%) of the remaining portion of the Account Fee with the IAR based on the agreement between LPL and the IAR. The portion of the Account Fee paid to the Portfolio Strategist is negotiated between LPL and the Portfolio Strategist and ranges from 0.00% to 0.20% as set forth in the schedule above. The fee rates charged by Portfolio Strategists vary based on the Portfolio selected. In providing ongoing advice and management for the Account, the IAR may recommend or select a Portfolio that would result in the IAR retaining more or less of the Account Fee than it would if another Portfolio were recommended or selected. How the Account Fee is Charged LPL deducts the Account Fee and other fees and charges associated with an MWP account from the account. LPL calculates and deducts the Account Fee in the method described in the Account Agreement, unless other arrangements are made in writing. If a client wishes to be billed for the Account Fee, rather than a deduction directly from the account, the client needs to make a request to LPL through the IAR. Payment in Advance and Refund of Pre-Paid Fees LPL deducts the Account Fee quarterly in advance. If the Account Agreement is terminated before the end of the quarterly period, LPL will pay the client a pro-rated refund of any pre-paid quarterly Account Fee based on the number of days remaining in the quarter after the termination date. However, if the account is closed within the first six months by the client or as a result of withdrawals that bring the account value below the required minimum, LPL reserves the right to retain the pre-paid quarterly Account Fee for the current quarter in order to cover the administrative costs of establishing the account (for example, the costs LPL FINANCIAL LLC Page 4

5 related to transferring positions in and out of the account, data entry in opening the account, reconciliation of positions in order to issue quarterly performance information, and re-registration of positions). After the termination date, LPL may convert the account to a brokerage account. In a brokerage account, client is charged a commission for each transaction and LPL and the IAR have no responsibility to provide ongoing investment advice. Other Types of Fees and Expenses of LPL In addition to the Account Fee, clients also pay LPL other additional miscellaneous administrative or custodial-related fees and charges that apply to an MWP account. LPL notifies clients of these charges at account opening and makes available a current list of these charges on its website at These fees include retirement account fees and termination fees, including, for example, a fee for loans processed for qualified retirement plan and 403(b)(7) plan accounts and an account termination fee for processing a full account transfer to another financial institution. These miscellaneous fees are not directly based on the costs of the transaction or service by LPL, may include a profit to LPL, and certain of the fees may be lowered or waived for certain clients. Fees Charged by Third Parties There are other fees and charges that are imposed by third parties other than LPL that apply to investments in MWP accounts. Some of these fees and charges are described below. In MWP, assets are invested in mutual funds or ETFs and, therefore, there are two layers of advisory fees and expenses for those assets. Client will pay an advisory fee to the fund manager and other expenses as a shareholder of the fund. In the case of mutual funds that are fund of funds, there could be an additional layer of fees, including performance fees that vary depending on the performance of the fund. Client will also pay LPL and IAR the Account Fee with respect to those assets. The mutual funds and ETFs available in the program can be purchased directly. Therefore, clients could generally avoid an additional layer of fees by not using the advisory services of LPL and IAR and by making their own decisions regarding the investment. Clients should understand that the share class offered for a particular mutual fund through the Program in many cases will not be the least expensive share class that the mutual fund makes available. Other financial services firm may offer the same mutual fund at a lower overall cost to the investor than is available through the Program. If client transfers into an MWP account a previously purchased mutual fund, and there is an applicable contingent deferred sales charge on the fund, client will pay that charge when the mutual fund is sold. If the account is invested in a mutual fund that charges a fee if a redemption is made within a specific time period after the investment, client will be charged a redemption fee. If a mutual fund has a frequent trading policy, the policy can limit a client s transactions in shares of the fund (e.g., for rebalancing, liquidations, deposits or tax harvesting). Decisions regarding the sale of mutual funds in an account may be made by LPL without regard to whether a client will be assessed a redemption fee. Clients can find more information regarding the fees and expenses of a mutual fund or ETF in the fund s prospectus, which is available upon request from the IAR or directly from the fund. When transferring securities into an MWP account, client should be aware that certain securities are not be eligible for the account. In such case, the securities may be rejected, sold after the transfer, or moved to a brokerage account. Note that when an ineligible security is transferred into an account and subsequently sold or moved to a brokerage account, the advisory fee will be charged on such asset for the period of time the security was held in the account. Client should be aware that securities transferred into an account may have been subject to a commission or sales load when the security was originally purchased. After transfer into an MWP account, client should understand that an advisory fee will be charged based on the total assets in the account, including the transferred security. When transferring securities into an account, client should consider and speak to IAR about whether: a commission was previously paid on the security; client wishes for the security to be managed as part of the account and be subject to an advisory fee; or client wishes to hold the security in a brokerage account that is not managed and not subject to an advisory fee. For those Portfolios consisting of mutual funds, LPL selects only no-load and load-waived mutual funds. In some cases, a mutual fund in MWP will charge shareholders an asset based sales charge or service fee (e.g., 12b-1 fee) that is paid to LPL. For retirement accounts, 12b-1 fees paid to LPL by mutual funds are credited to the account. A retirement account for purposes of this Brochure is an account held by plan subject to the Employee Retirement Income Security Act of 1974 ( ERISA ) or an account otherwise LPL FINANCIAL LLC Page 5

6 subject to Section 4975 of the Internal Revenue Code (e.g., an individual retirement account or IRA). The receipt of 12b-1 fees presents a potential conflict of interest because it gives an incentive to LPL or an affiliated Portfolio Strategist to recommend mutual funds for non-retirement accounts based on the compensation received rather than on a client s needs. LPL does not share 12b-1 fees with IARs in the MWP program. Portfolio Strategists (other than LPL) do not share in this compensation. Important Things to Consider About Fees on a MWP Account The Account Fee is a wrap fee for investment advisory services, the execution of transactions and other administrative and custodial services. Clients do not pay a commission or transaction charge to LPL for the execution of transactions in the account. The Account Fee may cost the client more than purchasing the program services separately, for example, paying an advisory fee plus commissions or transaction charges to a broker-dealer for each transaction in the account. Factors that bear upon the cost of the account in relation to the cost of the same services purchased separately include the: type and size of the account type of securities in the Portfolio (whether mutual funds or ETFs) historical and or expected size or number of trades for the account, and number and range of supplementary advisory and client-related services provided to the client. The Account Fee may be higher than the fees charged by other investment advisors for similar services. This is the case in particular if the Advisor Fee component of the Account Fee is at or near the maximum fee set out above. The IAR is responsible for determining the Advisor Fee to charge each client based on factors such as total amount of assets involved in the relationship, the number, complexity and mix of the Portfolios, and the number and range of supplementary advisory and client-related services to be provided to the account. Clients should consider the level and complexity of the advisory services to be provided when negotiating the Advisor Fee with IAR. With regard to accounts under the legacy aggregate Account Fee structure, although the IAR cannot increase the overall Account Fee, because the portion of the Account Fee retained by the IAR varies depending on the Portfolio Strategist fee associated with a Portfolio, the IAR has a financial incentive to select one Portfolio instead of another Portfolio. The investment products available to be purchased in the program can be purchased by clients outside of an MWP account, through broker-dealers or other investment firms not affiliated with LPL. Clients should consider the impact of fees and expenses on their investment portfolio, as described in the informational brochure titled How Fees and Expenses Affect Your Portfolio on the LPL.com Investor Regulatory Resources page. ITEM 5 ACCOUNT REQUIREMENTS AND TYPES OF CLIENTS LPL requires a minimum asset value for a program account to be managed. The minimums vary depending on the Portfolio(s) selected and the account s allocation amongst Portfolios. The lowest minimum for a Portfolio is $25,000. In certain instances, LPL will permit a lower minimum for a Portfolio. Note that an account will not be invested according to a Portfolio or Portfolios until the applicable minimum for the Portfolio(s) and allocation has been reached. Clients should consult with IAR to obtain more information about the applicable investment minimum based on the Portfolio(s) selected and the allocation amongst Portfolios. The program is available for individuals, IRAs, banks and thrift institutions, pension and profit sharing plans, including plans subject to ERISA, trusts, estates, charitable organizations, state and municipal government entities, corporations and other business entities. ITEM 6 PORTFOLIO MANAGER SELECTION AND EVALUATION In MWP, LPL and IAR are responsible for the overall investment advice and management services offered to clients, and the client selects the IAR who manages the account. LPL generally requires that individuals involved in determining or giving investment advice have at least two years financial planning, advisory or brokerage-related experience. Each IAR is also generally required to possess a FINRA Series 6, 7, 65, or 66 license (to the extent required). For more information about the IAR managing the account, client should refer to the Brochure Supplement for the IAR, which client should have received along with this Brochure at the time client opened the account. LPL makes available Portfolios designed by LPL, third party Portfolio Strategists and the applicable IAR. LPL reviews on a perioidic basis IARs acting as Portfolio Strategists on MWP. LPL FINANCIAL LLC Page 6

7 In addition, LPL selects and reviews on a periodic basis the third party Portfolio Strategists available on MWP. LPL uses information provided by the third party Portfolio Strategist and also may use independent, third party data sources when evaluating such Portfolio Strategist. Third party Portfolio Strategist performance information is not calculated on a uniform and consistent basis. LPL does not review performance information to determine or verify its accuracy and does not calculate third party Portfolio Strategist performance. However, LPL provides clients with individual quarterly performance information. Performance information distributed is compiled by LPL using third party portfolio accounting and reporting software. Client performance information is calculated on a uniform and consistent basis using a time weighted basis. Performance information is intended to inform clients as to how their investments have performed for a period, both on an absolute basis and compared to investment indices. It is important to note that third party Portfolio Strategists provide the Portfolios to LPL, and it is LPL that has discretion for trade implementation and execution in MWP accounts. Therefore, Portfolios submitted to LPL by third party Portfolio Strategists may represent activity that has already been implemented on behalf of other clients of such Portfolio Strategists. Because of this fact and because LPL (and not the third party Portfolio Strategist) has discretionary authority to implement trades, performance of an MWP account will differ from the performance of such Portfolio Strategist s discretionary accounts. LPL as a Portfolio Strategist In MWP, clients can invest in Portfolios designed by LPL s Research Department. LPL s Research Department provides various types of advisory services. LPL Research provides research recommendations on asset allocation and mutual funds and ETFs. LPL Research provides investment advice on mutual fund selection and allocation through other LPL advisory programs, such as Optimum Market Portfolios and Personal Wealth Portfolios. LPL Research also reviews and recommends outside portfolio management firms for LPL s separately managed account wrap program, Manager Select. LPL Research designs many types of mutual fund and ETF Portfolios for MWP to meet the varying needs of clients. It is important to note that no methodology or investment strategy is guaranteed to be successful or profitable. Historically, LPL Research created portfolios called Diversified or Diversified Plus. Both of these portfolios sought to promote capital appreciation while taking on a reasonable amount of risk in an effort to achieve that goal. Differences between the portfolios were related to the degree to which nontraditional asset classes could be used and the fluctuation in the number of holdings. Because these differences became less meaningful over time, LPL Research has ceased offering this differentiation. Existing accounts will be blended into the same portfolio over time, and this differentiation will no longer be used with respect to portfolios. Please ask your IAR for additional information. LPL Research designs different types of Portfoliosfor different timeframes, needs or themes that have meaning to investors. For different timeframes, clients can choose either a strategic or tactical version for some Portfolios. The allocations in the strategic Portfolios are intended to help take advantage of market opportunities LPL Research believes will occur or persist throughout a 3 to 5 year timeframe and are intended for investors who take a longer term view or who are more tax sensitive. Tactical Portfolios are more flexible and are designed to help take advantage of shor-t, mid-, and long-term opportunities the markets present and are intended for clients who wish to take advantage of shorter-term market opportunities and are not opposed to the prospect of more frequent trading. In terms of themes, LPL Research designs alpha-focused Portfolios that are structured for more aggressive investors. One Portfolio (technical equity) uses solely technical analysis to invest in core equities, specific sectors, and other opportunities. It is momentum based and is designed primarily on quantitative metric inputs. There are also downside risk aware Portfolios that are intended to be structured more conservatively to help provide more protection in the event of a down market. LPL Research designs Portfolios that are solely allocated to alternative strategies to provide diversified exposure to those more esoteric asset classes. LPL Research designs Portfolios intended for investors who place a priority on income generation and Portfolios for investors seeking to minimize tax impacts. Such income generation versions are available in investment objectives that are not typically focused on income. Because the Portfolios invest in mutual funds and ETFs and not directly in individual stocks and bonds, clients generally cannot restrict individual securities in a program account, for example, to invest in ESG (Environmental, LPL FINANCIAL LLC Page 7

8 Social, Governance) objectives. Additionally, LPL Research designs portfolios intended for investors who want to invest primarily with certain mutual fund families (referred to as the Core Select series).. Additionally, LPL Research designs three portfolios that invest in a combination of ETFs, ETNs, and mutual funds. One of these portfolios is designed to produce a targeted absolute return (tactical absolute return). Additionally, there are two portfolios designed to provide returns similar to those obtained by conservative treasury bonds without holding any of those traditional bonds: quad core balanced and quad core income. IAR as Portfolio Strategist In addition to portfolios designed by LPL Research and third party Portfolio Strategists, clients can invest in portfolios managed by their IAR. The IAR is responsible for selecting the mutual funds and/or ETFs within a Portfolio, the asset allocation for the Portfolio, and for making changes to the funds selected and asset allocation over time. Exchange-traded notes ( ETN ) and closed-end funds may also be purchased in an account. The IAR will typically manage Portfolios tailored to an investment theme or particular style that is core to the IAR s beliefs and expertise. Each IAR chooses his/her own research methods, investment strategy and management philosophy. It is important to note that no methodology or investment strategy is guaranteed to be successful or profitable. The IAR has access to various research reports, including those provided by LPL s Research Department, to which he/she may refer in determining which securities to purchase or sell. As OPM, LPL has discretion to buy and sell securities in the Account (according to the Portfolio selected) and to liquidate previously purchased securities that are transferred into the Account. LPL expects to closely track the Portfolios, applying discretion only to redress particular account issues, including tax rebalancing, loss harvesting, tracking error from the Portfolio, customized requests, and investment restrictions placed on the account. Types of Investments and Risks The Portfolios may include different types of securities, such as mutual funds, closed end funds, ETFs and ETNs. Investing in securities involves the risk of loss that clients should be prepared to bear. Described below are some risks associated with investing and with some types of investments that are available in the program. Market Risk. This is the risk that the value of securities owned by an investor may go up or down, sometimes rapidly or unpredictably, due to factors affecting securities markets generally or particular industries. Interest Rate Risk. This is the risk that fixed income securities will decline in value because of an increase in interest rates; a bond or a fixed income fund with a longer duration will be more sensitive to changes in interest rates than a bond or bond fund with a shorter duration. Credit Risk. This is the risk that an investor could lose money if the issuer or guarantor of a fixed income security is unable or unwilling to meet its financial obligations. Issuer Specific Risk. This is the risk that the value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Investment Company Risk. To the extent a client account invests in ETFs or other investment companies, its performance will be affected by the performance of those other investment companies. Investments in ETFs and other investment companies are subject to the risks of the investment companies investments, as well as to the investment companies expenses. If a client account invests in other investment companies, the client account may receive distributions of taxable gains from portfolio transactions by that investment company and may recognize taxable gains from transactions in shares of that investment company, which would be taxable when distributed. Concentration Risk. To the extent a client account concentrates its investments by investing a significant portion of its assets in the securities of a single issuer, industry, sector, country or region, the overall adverse impact on the client of adverse developments in the business of such issuer, such industry or such government could be considerably greater than if they did not concentrate their investments to such an extent. Sector Risk. To the extent a client account invests more heavily in particular sectors, industries, or sub sectors of the market, its performance will be especially sensitive to developments that significantly affect those sectors, industries, or subsectors. An individual sector, industry, or sub sector of the market may be more volatile, and may perform differently, than LPL FINANCIAL LLC Page 8

9 the broader market. The several industries that constitute a sector may all react in the same way to economic, political or regulatory events. A client account s performance could be affected if the sectors, industries, or sub sectors do not perform as expected. Alternatively, the lack of exposure to one or more sectors or industries may adversely affect performance. Alternative Strategy Mutual Funds. Certain mutual funds available in the program invest primarily in alternative investments and/or strategies. Investing in alternative investments and/or strategies involves special risks, such as risks associated with commodities, real estate, leverage, selling securities short, the use of derivatives, potential adverse market forces, regulatory changes and potential illiquidity. There are special risks associated with mutual funds that invest principally in real estate securities, such as sensitivity to changes in real estate values and interest rates and price volatility because of the fund s concentration in the real estate industry. These types of funds tend to have higher expense ratios than more traditional mutual funds. They also tend to be newer and have less of a track record or performance history. Closed-End Funds. Client should be aware that closed-end funds available within the program may not be readily marketable. In an effort to provide investor liquidity, the funds may offer to repurchase a certain percentage of shares at net asset value on a periodic basis. Thus, clients may be unable to liquidate all or a portion of their shares in these types of funds. Exchange-Traded Funds (ETFs). ETFs are typically investment companies that are legally classified as open end mutual funds or UITs. However, they differ from traditional mutual funds, in particular, in that ETF shares are listed on a securities exchange. Shares can be bought and sold throughout the trading day like shares of other publicly-traded companies. ETF shares may trade at a discount or premium to their net asset value. This difference between the bid price and the ask price is often referred to as the spread. The spread varies over time based on the ETF s trading volume and market liquidity, and is generally lower if the ETF has a lot of trading volume and market liquidity and higher if the ETF has little trading volume and market liquidity. Although many ETFs are registered as an investment company under the Investment Company Act of 1940 like traditional mutual funds, some ETFs, in particular those that invest in commodities, are not registered as an investment company. ETFs may be closed and liquidated at the discretion of the issuing company. Exchange-Traded Notes (ETNs). An ETN is a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark. ETNs may be linked to a variety of assets, for example, commodity futures, foreign currency and equities. ETNs are similar to ETFs in that they are listed on an exchange and can typically be bought or sold throughout the trading day. However, an ETN is not a mutual fund and does not have a net asset value; the ETN trades at the prevailing market price. Some of the more common risks of an ETN are as follows: The repayment of the principal, interest (if any), and the payment of any returns at maturity or upon redemption are dependent upon the ETN issuer s ability to pay. In addition, the trading price of the ETN in the secondary market may be adversely impacted if the issuer s credit rating is downgraded. The index or asset class for performance replication in an ETN may or may not be concentrated in a specific sector, asset class or country and may therefore carry specific risks. ETNs may be closed and liquidated at the discretion of the issuing company. Leveraged and Inverse ETFs, ETNs and Mutual Funds. Leveraged ETFs, ETNs and mutual funds, sometimes labeled ultra or 2x for example, are designed to provide a multiple of the underlying index's return, typically on a daily basis. Inverse products are designed to provide the opposite of the return of the underlying index, typically on a daily basis. These products are different from and can be riskier than traditional ETFs, ETNs and mutual funds. Although these products are designed to provide returns that generally correspond to the underlying index, they may not be able to exactly replicate the performance of the index because of fund expenses and other factors. This is referred to as tracking error. Continual resetting of returns within the product may add to the underlying costs and increase the tracking error. As a result, this may prevent these products from achieving their investment objective. In addition, compounding of the returns can produce a divergence from the underlying index over time, in particular for leveraged products. In highly volatile markets with large positive and negative swings, return distortions may be magnified over time. Some deviations from the stated objectives, to the positive or negative, are possible and may or may not correct themselves over time. To accomplish their objectives, these products use a range of strategies, including swaps, futures contracts and other derivatives. These products may not be diversified and can be based on commodities or currencies. These products may have higher expense ratios and be less tax-efficient than more traditional ETFs, ETNs and mutual funds. LPL FINANCIAL LLC Page 9

10 Voting Client Securities In MWP, LPL and IARs do not accept authority to vote client securities. Clients retain the right to vote all proxies that are solicited for securities held in the account. Clients will receive proxies or other solicitations from LPL. If clients have questions regarding the solicitation, they should contact the contact person that the issuer identifies in the proxy materials or their IAR. In addition, LPL and IARs do not accept authority to take action with respect to legal proceedings relating to securities held in the account. ITEM 7 CLIENT INFORMATION PROVIDED TO PORTFOLIO MANAGERS The IAR obtains the necessary financial data from the client and assists the client in setting appropriate investment objectives for the account. The IAR obtains this information by having the client complete an Account Application which is a part of the Account Agreement. In quarterly communications, LPL asks clients to contact the IAR if there have been any changes in the client s financial situation or investment objective or if they wish to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions. Because third party Portfolio Strategist s role is limited to providing Portfolios to LPL, and does not provide individualized discretionary advisory services to MWP clients, LPL generally does not communicate specific client information to third party Portfolio Strategists. Clients should understand that the investment objective selected for the program in the Account Application is an overall objective for the entire account and may be inconsistent with a particular holding and the account s performance at any time. Client also should be aware that achievement of the stated investment objective is a long-term goal for the account. ITEM 8 CLIENT CONTACT WITH PORTFOLIO MANAGERS LPL does not place any restrictions on a client s ability to contact and consult with IARs. Because a third party Portfolio Strategist s role is solely to provide Portfolios to LPL, and not to provide individualized discretionary advisory services to MWP clients, third party Portfolio Strategists generally are not available to be contacted or consulted by MWP clients. ITEM 9 ADDITIONAL INFORMATION Disciplinary Information As an investment advisor and broker-dealer regulated by the SEC, LPL was found by the SEC to have willfully violated Rule 30(a) of Regulation S-P, which requires broker-dealers and investment advisors to have written policies and procedures that are reasonably designed to safeguard customer records and information. The SEC ordered LPL to cease and desist from committing future violations of Rule 30(a), censured it for its conduct, and ordered it to pay a $275,000 penalty (2008). LPL, as a broker-dealer, is a member of FINRA and has found to be in violation of FINRA s rules related to its brokerage activities. In particular, LPL consented to sanctions related to the following matters: LPL s systems and supervisory procedures relating to the creation and distribution of certain required account notices, resulting in a censure, a fine of $900,000, and an undertaking to review affected processes (2016). LPL s systems and supervisory procedures relating to the format in which certain electronic records were retained, resulting in a censure and a fine of $750,000 (2016). LPL s various brokerage supervisory procedures, including those related to the sale of complex non-traditional ETFs, variable annuity ( VA ) contracts, real estate investment trusts ( REITs ) and other products in brokerage accounts, as well as LPL s failure to monitor and report trades and deliver trade confirmations, resulting in a censure and a fine of $10,000,000, and restitution of $1,664,592 (2015). LPL s processing and supervision of the sale of alternative investments, including non-traded REITs, resulting in a censure and a fine of $950,000 (2014). LPL s systems and procedures related to the review and retention of , resulting in a censure, a fine of $7.5 million, and establishment of a fund of $1.5 million to cover payments to eligible former brokerage customer claimants who may not have received all s in connection with their claim (2013). LPL s supervisory systems to monitor and ensure the timely delivery of mutual fund prospectuses, resulting in a censure and a fine of $400,000 (2012). LPL FINANCIAL LLC Page 10

11 LPL s procedures regarding its review of communications, resulting in a censure and a fine of $100,000 (2011). LPL s procedures on transmittals of cash and securities from customer accounts to third party accounts, resulting in a censure and a fine of $100,000 (2011). LPL s procedures on supervision of VA exchanges, resulting in a censure and a fine of $175,000 (2010). Allegations that LPL failed to reasonably supervise a registered representative regarding his use of strategies and recommendations involving UITs, resulting in a censure and a fine of $125,000 (2008). LPL, as a broker-dealer, is regulated by each of the 50 states and has been the subject of orders related to the violation of state laws and regulations in connection with its brokerage activities. In particular, LPL entered into consent orders related to the following matters: The sale of non-traded alternative investments in excess of prospectus standards or LPL s internal guidelines and the maintenance of related books and records, resulting in a censure, a fine of $950,000, a $25,000 contribution to an investor education fund and remediation of losses to impacted customers (New Jersey, 2017). LPL s supervisory practices for LPL representatives located on the premises of a credit union, resulting in a censure, a fine of $1,000,000, and an undertaking to avoid investor confusion specific to the name under which the credit union does business and review LPL s related policies and procedures (Massachusetts or MA, 2017). LPL s oversight of certain VA transactions, resulting in a censure, a fine of $975,000, restitution to clients and former clients of an LPL representative, disgorgement of commissions retained by LPL in connection with such representative s VA sales, and an undertaking to review such representative s brokerage and advisory activities and LPL s related policies and procedures (MA, 2017). The sale in brokerage accounts of non-traded REITs in excess of prospectus standards, state concentration limits or LPL s internal guidelines, resulting in an aggregate civil penalty of $1,425,000, reimbursement of certain investigative expenses and remediation of losses to impacted customers (Global settlement with certain members of the North American Securities Administrators Association (NASAA), 2015). The sale of non-traded REITs in excess of prospectus standards, state concentration limits or LPL s internal guidelines, resulting in an administrative fine of $250,000, reimbursement of investigative costs of $250,000, a $250,000 contribution to an investor education fund and remediation of losses to impacted customers (New Hampshire, 2015). The sale of leveraged and inverse leveraged ETFs ( Leveraged ETFs ), resulting in an administrative fine of $50,000 (Delaware), a penalty of $200,000 (MA), restitution to Delaware customers in an amount up to $150,000, restitution to MA customers in an amount up to $1,600,000, and an agreement to make certain changes in its supervisory system with respect to Leveraged ETFs (2015). Failure to implement procedures related to the use of senior-specific titles by LPL representatives as required under MA law, resulting in a censure and a fine of $250,000 (2015). Failure to detect improper and fraudulent conduct by an LPL representative, resulting in a censure, a fine of $500,000, and restitution to impacted customers; and failure to adequately enforce supervisory procedures and maintain certain books and records required under Illinois law in connection with certain VA exchange transactions, resulting in a censure, a fine of $2,000,000, and restitution to impacted customers (2014). The sale of non-traded REITs to MA residents in excess of MA concentration limits, resulting in a censure, a fine of $500,000, and restitution to impacted customers (2013). For more information about those state events and other disciplinary and legal events involving LPL and its IARs, client should refer to Investment Advisor Public Disclosure at or FINRA BrokerCheck at Other Financial Industry Activities and Affiliations LPL is a broker-dealer registered with FINRA and the SEC. As a broker-dealer, LPL transacts business in various types of securities, including mutual funds, stocks, bonds, commodities, options, private and public partnerships, variable annuities, REITs and other investment products. LPL is registered to operate in all 50 states and has primarily an independent-contractor sales force of registered representatives and IARs dispersed throughout the United States. LPL has a small number of employee LPL FINANCIAL LLC Page 11

12 IARs whose services are limited to servicing certain small IRA accounts. IARs are registered representatives of LPL. If required for their positions with a registered broker-dealer, LPL s principal executive officers are securities licensed as registered representatives of LPL. LPL is also registered as a transfer agent with the SEC and as an introducing broker with the Commodity Futures Trading Commission. In addition, LPL is qualified to sell insurance products in all 50 states. LPL has an arrangement with Fortigent, LLC ( Fortigent ), a registered investment advisor and related person of LPL. LPL and Fortigent have entered into an agreement for LPL to provide overlay portfolio management services to Fortigent clients in Fortigent s Access Overlay II Program. LPL and The Private Trust Company, N.A. ( PTC ), a federally chartered non-depository bank licensed to provide trust services in all 50 states, are related persons. PTC serves as IRA custodian for program accounts set up as individual retirement accounts. PTC also provides personal trustee services to clients for a variety of administrative fiduciary service, which services may relate to a program account. PTC s IRA custodian and trustee services and fees are established under a separate engagement between the client and PTC. Code of Ethics and Personal Trading LPL has adopted a code of ethics that includes guidelines regarding personal securities transactions of its employees and IARs. The code of ethics permits LPL employees and IARs to invest for their own personal accounts in the same securities that LPL and IARs purchase for clients in program accounts. This presents a conflict of interest because trading by an employee or IAR in a personal securities account in the same security on or about the same time as trading by a client can disadvantage the client. LPL addresses this conflict of interest by requiring in its code of ethics that LPL employees and IARs report certain personal securities transactions and holdings to LPL. LPL has procedures to review personal trading accounts for front-running. In addition, employees in LPL s Research Department are required to obtain pre-clearance prior to purchasing certain securities for a personal account. Employees and IARs are also required to obtain pre-approval for investments in private placements and initial public offerings. A copy of the code of ethics is available to clients or prospective clients upon request and is available on LPL s website Participation or Interest in Client Transactions Purchases of mutual fund shares are typically processed through LPL's proprietary account resulting in its being characterized as a principal transaction for certain reporting purposes. In such case, the shares will be purchased at the fund s net asset value, and no additional charges will be applied to such transactions as a result of LPL s use of a proprietary account. LPL does not otherwise engage in principal transactions with its clients in MWP. LPL s parent company, LPL Financial Holdings Inc., is a publicly traded company. LPL Financial Holdings Inc. stock may not be purchased in MWP accounts. However, a model may include a mutual fund or ETF that holds LPL Financial Holdings Inc. stock as an underlying investment, for example, an ETF that seeks to replicate the performance of an investment services index that includes LPL Financial Holdings Inc. LPL performs recordkeeping and administrative services on behalf of mutual funds and receives compensation for the services based on mutual fund holdings of MWP clients. These services include establishing and maintaining sub-account records reflecting the issuance, exchange or redemption of shares by each program account. A type of recordkeeping service that LPL provides to certain mutual fund families is to process transactions on an omnibus basis, which means that LPL consolidates client trades into one daily trade with a fund, and maintains all pertinent shareholder information for the fund. If LPL does not provide omnibus services to a mutual fund, then fund shares are traded on a networked basis, which means LPL submits a separate trade for each individual client trade to the fund. In that case, LPL maintains only certain elements of the fund s shareholder information. The compensation LPL receives for these recordkeeping services is paid based on MWP client assets in the fund (up to 0.25% annually) or number of positions held by MWP clients in the fund (up to $25 per position). Because LPL provides additional services to funds where positions are held on an omnibus basis, the fees for omnibus services are generally higher than networked positions. This compensation presents a potential conflict of interest to LPL, because LPL has an incentive to select a fund that pays recordkeeping fees over one that does not and a fund that pays a higher recordkeeping fee over a lower fee. LPL addresses the potential conflict by disclosing the compensation to clients and listing on its website the mutual fund families that LPL FINANCIAL LLC Page 12